The government-run “single-payer” healthcare program defeated earlier this year in the Assembly would cost $449 billion to $552 billion a year if approved, the Legislative Analyst Office estimated March 15, adding that “given the enormous uncertainty involved, the ultimate costs … could be lower or higher than our range indicates by tens of billions of dollars.”
Either amount would be far more than the total state spending of $286.5 billion proposed by Governor Gavin Newsom for the 2022-23 fiscal year for education, prisons, courts, health programs, and all other state operations.
In a letter responding to the Assembly Rules Committee’s request for a financial analysis of AB 1400 (the implementation bill) and ACA 11 (a measure that includes a variety of tax increases) by Assembly Member Ash Karla, the analyst also estimated the taxes proposed in ACA 11 would raise $120 billion to $164 billion a year under current economic conditions, so if both pieces of legislation were approved the new “CalCare” program would have a funding shortfall of $70 billion to $193 billion.
The estimates reflect what costs would be in 2022 if CalCare had been fully operational at the beginning of the year. “Accordingly, the estimates generally reflect what the ongoing annual costs of CalCare would be in terms of 2022 prices,” the analyst stated. “We generally do not account for the likely significant, limited-term costs of setting up CalCare and do not project how CalCare could change health care cost growth over the long term.”
The estimates represent lower-cost and higher-cost scenarios, based on different assumptions, the analyst explained.
“A primary reason for the range in our revenue estimates is that predicting how taxpayers would respond is difficult,” the analyst wrote. “In general, taxable activities decline when tax rates increase. These declines can result from an actual reduction in economic activity, such as less business growth or reduced hiring. In many cases, however, they can arise from taxpayers changing their accounting practices, investment strategies, or business organization in ways that reduce their tax costs without significantly altering overall economic activity. Our estimates incorporate all of these types of responses. We base these estimates on a review of research on taxes applied to broad categories of economic activity, such as those in ACA 11. Overall, while there could be a meaningful reduction in activities taxed by ACA 11, we anticipate that the vast majority of existing economic activity in the state would continue.”
“[O]ur findings should be considered preliminary and would be subject to refinement and revision with further analysis,” the analyst wrote. “Moreover, given the scope of changes CalCare would introduce, some elements of fiscal uncertainty likely could not be reduced with further analysis.”
The analyst also reported:
- CalCare could cost $9 billion to $67 billion more than existing statewide healthcare expenditures (an increase of 2 percent to 14 percent).
- The revenue raised under ACA 11 would grow over time, but the growth “would fluctuate from year to year with changing economic conditions.” The analyst added: “Most of the time, annual revenue growth probably would fluctuate by a few billion dollars around a long-term trend. During recessions, however, these annual fluctuations could be greater, exceeding $10 billion. This revenue volatility poses a challenge for the financing of CalCare – albeit one that could be overcome with proper planning.”
- CalCare costs would vary from year to year with changes in claims volume and healthcare cost pressures. The analyst estimated that “costs typically would grow by at least $20 billion to $30 billion annually,” but “there could be smaller or larger fluctuations in any given year.”
- Nearly all private health care expenditures under the existing system would disappear under CalCare and generally be replaced with public expenditures on health care.
- “Under CalCare, managed care essentially would be eliminated, which we estimate would result in lower net costs of around $23 billion compared to total existing health care expenditures. We assume the elimination of managed care would have two major effects on health care expenditures. First, existing spending that supports managed care plan administration and earnings would disappear, resulting in about $40 billion (8 percent) in savings compared to total health care expenditures today. Second, the elimination of managed care largely would eliminate the mechanisms managed care plans currently have in place for controlling service utilization. We assume the elimination of these mechanisms would increase the cost of CalCare by around $17 billion (4 percent) relative to total current health care expenditures.”
- The new gross receipts tax (GRT) included in ACA 11 “does not provide an explicit exemption for the application of the GRT to direct health care services provided under CalCare,” so the analyst assumed that “CalCare costs would increase by $8 billion under the low-cost scenario and $9 billion under the high-cost scenario to reflect the payment of the GRT on health care services.”
- The state no longer would provide health insurance coverage to state employees, but instead would be required to pay payroll taxes required under ACA 11. “We estimate the cost of these taxes to be $1.6 billion,” the analyst stated, adding that the cost “would be more than offset by the reduction in costs associated with providing health insurance coverage.”
“Key drivers of uncertainty include a lack of detailed data on certain components of existing health care expenditures, the unprecedented nature of the transformation of the state’s health care delivery and financing system that would occur under CalCare, and gaps and disagreements in the research around the impacts CalCare’s specific changes would have on costs,” the analyst wrote. “For example, there is significant uncertainty regarding the impacts on health care utilization as a result of the elimination of managed care. As another example, there is uncertainty regarding the extent to which there would be constraints on the supply of providers given the expansion of health care coverage.”